Chapter 2 Understanding Economics and How it Affects Business

Which of the following are correct with regards to a free-market economy?

An economic system in which economic decisions are made by the market Another name for capitalism

The economy has ____ ,which are the rising and falling of the economy as a whole over time.

Business cycles

____ is the economic system that has led to wealth creation in much of the developed world.

Capitalism

_____ is an economic system based on free markets, in which all or most of the factors of production and distribution are privately owned and are operated for profit

Capitalism

Rank the three economic system where the system with the least amount of government involvement is on the top and the system with the most government involvement is on the bottom.

Capitalism Socialism Communism

Economic systems can be classified into socialist, communist, and capitalist based on the ownership of land and businesses. Rank them with the economic system where the state has the least control over land and business at the top.

Capitalism Socialism Communism

After experiencing capitalism, some countries adopt a more socialist approach. Why?

Capitalism has some limitations

___ measures changes in prices of goods and services purchased for consumption by typical urban households.

Consumer Price Index (CPI)

____ is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.

Economics

What is the total value of final goods and services produced in country in a given year called?

Gross domestic product

As the price of a product increases, so will the amount supplied. Why?

High prices lead to high profits, attracting new firms to the market. High prices lead to increased revenues, which allow firms to buy more raw materials and employ more workers.

Why are taxes used to influence the economy?

High taxes draw the money away from the private sector Low taxes increases the profits a small business can earn They are used to stabilize the economy

Carlyle called economies the "dismal science" after reading the early work of ____

Malthus

___ looks at the behavior of individual people and organizations in specific markets

Microeconomics

The economic system based on the premise that some, if not most, basic industries should be owned by the government so that profits can be more evenly distributed among the people is called _____

Socialism

In free market the price of product depends on how much consumers are willing and able to buy and how the producers are willing and able to sell. What does the market price depend on in a free market?

Supply and demand

Socialism has several negative outcomes such as:

a brain drain higher taxes fewer incentives to work hard

Characteristics of monopolistic completion include:

a large number of sellers with similar products buyers that perceive similar products as different through marketing

The supply curve indicates the relationship between the price of the product and the quantity supplied. Following the curve fro left to right one can see that:

as the price increases, so does the quantity supplied

Although overall the population is growing more slowly than predicted, it is still growing very fast, especially in poor areas of the world. This is why some neo- Malthusians advocate for:

birth control

Due to much higher taxes in socialist countries, the best and brightest tend to leave such countries causing a_______

brain drain

In a free market system, decision about what and how much is produced are made by:

buyers and sellers negotiating prices

The popular term for free-market economies is ___

capitalism

The economic system in which the government largely determines what products get produced who gets them, and how the economy grows is called a:

command economy

In communism, shortages of food and clothing are the result of government intervention and control. As such, most communist countries exhibit a high level of economic misery. One outcome of such economic misery is that:

communism is slowly disappearing as an economic form

Sara lives in a country where one needs the government's approval to move between cities. Sara lives in a(n):

communist country

The monthly statistic that measures the pace of inflation, or deflation is called the ___ price index

consumer

CPI minus food and energy costs is called ___ inflation

core

Deflation may occur if:

countries produce so many products that people cannot afford to buy them all too few dollars are chasing too many products

Businesses offer goods and services with the purpose of marketing a profit and eventually increasing their owners' wealth. Simultaneously, businesses that pursue profit also:

create the opportunity for more wealth by producing goods and services used by other businesses increase their employees' wealth by paying them for their work

A recession occurs when there are two or more consecutive quarters of:

decline in the GDP

When prices are declining ___ is occurring

deflation

As prices decrease the quantity of goods and services in ___ tends to increase.

demand

____ is the quantity of goods and services consumers are willing to buy at different prices.

demand

A ___ is a severe recession usually accompanies by deflation.

depression

Higher interest rates:

deter businesses from borrowing money, which slows the economy and results in businesses spending less money on labor and machinery slow down the economy as businesspeople spend less money to expand make money more expensive to borrow

Businesses can benefit those communities in which they operate through resource development by:

discovering new energy resources finding new ways of growing food

A situation in which prices are increasing, but the rate of price increases is slowing is called ___

disinflation

During the recent collapse of many financial institution, top management still earned bonuses worth tens of hundreds of millions of dollars, whereas some people lost everything they owned including their pension. This can be seen as an example of how free markets sometimes lead to:

disparities in wealth

Huge differences in the wealth of relatively similar countries such as North and South Korea are an example of how different ____ conditions affect businesses.

economic

On a graph showing both supply and demand curves, the intersection point between the two curves shows the:

equilibrium price equilibrium point

In communist countries, prices are determined by the government, not by buyers and sellers. This is one of the main reasons their markets:

experience huge surpluses and shortages

While deciding if and how to open a restaurant in an eastern European country, ark researched the local conditions in different countries. He lookeded at the country's laws regarding private property and whether the country treated foreign citizens differently in this regard. Interestingly, a few countries did not allow foreign citizens to own property, He decided that he would only invest in a country where he could own the building the restaurant is in, because he likes to be independent. If many foreign investors are like Mark, then countries where foreign citizens cannot own private property will:

experience lower growth because foreigners will not bring money to the economy

Increased government spending is a main ____ policy tool

fiscal

During the latest recession, the government passed a stimulus bill that financed spending for infrastructure and other projects while the Fed lowered interest rates sharply. These are examples of:

fiscal policy monetary policy

The four types of unemployment are _____,______,_____,and ____

frictional structural cyclical seasonal

In a free-market system buyers and sellers together decide how many goods and services to produce. In command economies the ____ decides what how much should be produced.

government

In free-market economies the market largely determines what goods and services get produced, but in command economies these decision are made by the ___

government

Fiscal policy is the federal government's effort to keep the economy stable by increasing or decreasing:

governments spending taxes

Countries with a high GDP enjoy a ___ standard of living

high

A profitable business will benefit the society by:

hiring other small businesses to provide it with needed services such as maintenance purchasing needed supplies and materials hiring more employees

Businesses can benefit the community by:

hiring workers offering needed goods and services

The supply concept refers to the relationship between the quantity of products produced and price. If the market price of a product increases, quantity supplied will ____. If the market price of a product decreases, quantity supplied will ______.

increase decrease

Keynesian economic theory is the theory that the government could stimulate the economy in a recession by:

increasing spending cutting taxes

A general rise in the prices of goods and services over time is called ____

inflation

A persistent increase in the level of consumer prices is one way to describe ____

inflation

When there is a general rise in prices of goods and services over time, ___ has occurred

inflation

Fish farms create wealth by proving food and creating jobs. This is an example of:

innovation leading to more resources

Monetary policy consists of the Federal Reserve's management of the:

interests rates money supply

A phrase used to describe the process that turns self- directed gain into social and economic benefits for all is the _____

invisible hand

The intersection between the supply and demand curves:

is called the equilibrium point

When studying the operation of a nation's economy as a whole, one is said to be taking a(n) _____ view

macroeconomic

Studies about the effects of population growth on the economy are part of the branch of economies called ____

macroeconomics

Lower interest rates:

make it cheap to borrow money, so businesses borrow and therefore spend more money on labor and machinery

In recent decades, most capitalist countries like the United States have moved toward socialism. Communist countries like China have moved toward capitalism. IN other words the trend is to move toward ___ economies.

mixed

In the last century, the United States and other capitalist countries added more social services. Lately communist countries such as China have offered greater liberties such as the freedom to own private property. Clearly there seems to be a trend toward ____ economies

mixed

When some allocation of resources is made by the market and some is made by the government an economy is said to be a(n) ___ economy

mixed

____ economics are made up of elements from more than one economic system; for example where some allocation of resources is made by the market and some by the government

mixed

Since the United States has a few social programs controlled by the government such as Social Security, Medicare, and Medicaid, it can be said it has a:

mixed economy

Since the United States has a few social programs controlled by the government such as Social Security, Medicare, and Medicaid, it can be said that it has a:

mixed economy

The Federal Reserve's ___ policy involves management of the money supply and control of key interest rates.

monetary

Economists agree that there are four different degrees of completion within free markets. The four degrees are:

monopolistic competition monopoly perfect competition oligopoly

The sum of government deficits over time is called the:

national debt

The amount of money the federal government spends beyond what it gathers in taxes for a given fiscal year is called the:

national deficit

There are still followers of Thomas Malthus among today's scientist. They are called:

neo- Malthusians

In ____ there are a very few sellers, and product differentiation is the major factor in market successes. One example of a product corresponding to this degree of competition is the aircraft.

oligopolies

Having only a few sellers dominate a market indicates a(n):

oligopoly

Perfect completion, monopolistic completion, ____ and monopoly are the four degrees of competition.

oligopoly

A monopoly occurs when:

one seller controls the total supply of a product

Both supply and demand concepts rest on the relationship between quantity supplied or demanded and ____

price

Measuring levels of inflation, deflation, disinflation, and stagflation are greatly facilitated by the use of ___ indexes

price

Producers are likely to be interested in a measurement of prices at the wholesale level so they will refer to the ___ price index

producer

An increase in ___ means a worker can produce more goods and services than before in the same time period, reducing cost.

productivity

In perfect competition:

products appear to be identical there are many sellers

Under monopolistic competition:

products are perceived as different by the buyers there are large number of sellers in the market

Businesses contribute to the well-being of all by:

providing jobs and economic growth for their employees and communities

Jason is trying to devise a plan for getting oil from shale and tar sands in order to make better use of them. Jason is most likely working in ____

resource development

Both socialism and communism:

seem to lag behind capitalist countries in terms of innovation are supposed to offer a wide array of social services

Jonathan is a very bright student who dreams of becoming the next Bill Gates. After graduation, he started working hard but soon realized that the amount of money he received after taxes will never allow him to save enough to become rich or open a high-growth business.However, he soon remembered in his country students do not have to pay for college and therefore has no debt. Jonathan most likely lives in a(n):

socialist country

If prices continue to rise as the economy is slowing, then ____ is occurring

stagflation

if a shortage occurs in the free market:

suppliers will increase production prices will begin to rise

Socialism offered such benefits as free education and health care. However, the government has to pay for these services. Therefore:

taxes need fro be higher in socialist countries

Eduardo owns a farm in a country where taxes are very high and where the government openly considers the possibility of taking over the agriculture sector. Eduardo stopped investing in his farm and only works enough hours to be able to grow the good necessary for him and his family. Eduardo's behavior demonstrates that:

the freedom to own property and keep the profits from work is necessary to the survival of an economy

In an economic and political system called communism:

the government owns almost all the factors of production

What does the intersection between the demand and supply curves show?

the point where quantity supplied equals the quantity demanded

In the long run, the equilibrium price becomes the:

the price toward which the market will trend market price

Which of the following rights are among those considered the foundation of a capitalist system?

the right to own private property the right to freedom of competition

Three major U.S economic indicators are:

the unemployment rate price indexes GDP

The unemployment rate refers to the percentage of civilians at least 16 years old who are ____ and ____

tried to find a job within the prior 4 weeks unemployed

One possible microeconomic topic is:

understanding the supply of automobiles in the U.S market